Monday, August 06, 2012

Many finance-oriented critiques start from the position that our problems largely stem from the financial/political dominance of Elitist cartels and cabals. Clearly, the malinvestment, exploitation, predation and disregard for the law that characterizes the rule of political-financial Elites in both developed and developing nations have wreaked havoc on societies and economies around the globe.

Implicit in this critique is a dangerously naive assumption: if all our problems can be traced back to Elitist cabals such as the Federal Reserve and the European Central Bank, then it follows that the subjugation or eradication of these concentrations of self-serving power would remove the cause of our problems.

Alas, that would be a welcome step in the right direction, but that alone would not resolve the structural causes of our devolution. Freeing ourselves of self-serving Elites would certainly create an opening for structural transformation that is currently impossible, but the transformation will require changing much of what the average citizen takes for granted as a "given" or even "right."

For a little perspective on what lies ahead, let's consider the structural problems that remain even if we were fortunate enough to throw off the yoke of the Fed, the corporate cartels, and the entire system of Elitist dominance.

1. We would still have mountains of debt that will never be paid and enormous losses to write off. It would be nice is we could place all the inevitable losses as phantom assets are exposed to price discovery on bankers and Elites, but the reality is that these assets are distributed throughout the economy: as these phantom assets vanish, pension funds, insurance companies and other bulwarks of non-Elite wealth/security will have to write off significant portions of their assets.

Citizens will ultimately find their wealth/financial security has been degraded, perhaps severely. It's tempting to think that a "debt jubiliee" on (for example) student loans would "solve the problem," but this is not a pain-free solution: the $1 trillion in student loans are someone's assets, and the "someone" is not necessarily a banker or billionaire: it might be the pension fund that is paying Mom or Dad's pension.

The unpayable debts are only symptoms of a deeply flawed system. To see the debt as the problem is to ignore the system which created the "need" for that debt: in the education cartel, that is the entire system of "higher education," which is fundamentally a "skimming operation" not unlike its partner in crime, the financial industry and central State that creates and enforces the debt.

In other words, simply writing off debt does not address the structural causes of the debt. That will require a massive revolution in our understanding and delivery of education, and a wholesale elimination of tens of thousands of "skimming" positions within the education complex.

That means tens of thousands of people will lose their high-paying jobs.

You see the point being made here: living within our means requires a massive structural downsizing of assets, employment and expectations. An economy that has lived on the creation of debt (phantom assets) cannot be transformed by the mere writedown of debt: the entire structure that created and enforced that debt must be torn down, and everyone who skimmed off a profit or livelihood from that reliance on the machinery of debt will experience a decline in their standard of living.

2. We would still have a global economy facing the constraints of higher-cost energy and commodities. As we all know, it's easier to create phantom wealth than it is to create real goods such as grain, energy, gold, etc. Phantom assets are ultimately claims on A) income streams or B) real-world assets, and so all phantom assets are ultimately claims on a limited resource, either a commodity or an enterprise.

You can "grow" phantom assets to near-infinity, but that near-infinite sum of money will still distill down to a claim on limited resources and income streams.

As I have often noted here (thanks to correspondents Bart D. and Harun I.), energy may well be abundant at a certain price; what will be scarce is the cash/income to pay for that "abundant" energy. Abundance of a commodity that has a high cost-basis due to real-world constraints does not lead to lower prices: if it takes one barrel of oil to extract and refine three barrels of shale oil, the cost of those barrels cannot drop below the cost of extraction, refining, return on the capital invested, labor costs, etc.

Sellers of oil below cost will rapidly deplete their capital and go bust.

Eliminating Elites is a first good step, but it does not magically eliminate the constraints imposed on a phantom-asset based system. Living within our means will require a massive reduction not just in phantom assets but in the income that has been generated by those phantom assets. It won't just be bankers and billionaires who will be poorer; everyone with exposure to the financial system and the real-world costs of the FEW essentials (food, energy, water) will be poorer in terms of purchasing power.

3. As Status Quo policies fail, replacement policies will become less predictable in their implementation and unintended consequences. Recognizing that a policy has failed is only a first step; understanding the structural causes and designing a policy that won't alienate all the vested interests while addressing the problem is politically impossible until the crisis has left the Status Quo no other choice.

But there is very little history that informs the confluence of crises we now face; the more replacement policies diverge from the mainstream, the more unpredictable their comsequences become. As the saying has it, the road to Heck is paved with good intentions, and policy choices that seem common-sense in crisis could issue disastrous results.

Political expediency is a powerful force for unintended consequences. Even if we got rid of the Fed and various financial Elites, the losses trickling down to the Main Street economy would still be large enough to cause powerful vested interests (union and municipal pension plans, for example) to support Status Quo "saves" of phantom assets and the machinery of debt-creation.

Political expediency will not vanish along with the Fed; vested interests will still seek to impose self-serving policies that have not been thought out or tested in the real world on smaller scales. They will attempt to conserve their own wealth and power at the expense of the general citizenry or politically weaker rivals.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

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